Monday, 30 April 2012

Reuters (and several other news outlets) reported late last week that 75% of Americans support EPA moves to regulate carbon dioxide as a pollutant, and that 61% would vote for a Presidential candidate who advocated revenue-neutral carbon taxes to reduce greenhouse gas emissions. [Update: the original Yale-George Mason survey report can be found here.]

Interestingly, this support crossed party lines. 84% of Democrats, 77% of independents, and a whopping 67% of Republicans would support efforts to regulate greenhouse gas emissions.

That's pretty amazing.

Before this survey, one might have concluded that most Americans were opposed to climate change regulation, or were at best confused about the issue. After all, President Obama was unable to pass climate change legislation during his first two years in office. However, one would be wrong. People only have to look out their windows to see that the types of weather events predicted by climate researchers are coming to pass. Whatever confusion voters might have experienced is giving way to certainty.

These lopsided poll results came through in the face of the vociferous anti-environmental positions taken by many politicians, an organised disinformation campaign conducted by deep-pocketed lobbyists, and less-than-stellar media coverage. They show that the vast majority of people are able to see through to the real issues. The Reality-Based Majority knows that:

Climate change is real and human activity is the leading cause;

It is in our power to reduce greenhouse gas emissions and mitigate climate change impacts;

The benefits of taking action vastly outweigh the costs.

As I noted five years ago on this blog, climate change deniers and proponents of doing nothing are in the minority.

So what does all of this bode for companies?

The message is clear: pay attention to the survey results. True, the survey respondents are voters, and were asked about political issues. However, these same people are also customers, shareholders, and employees. In addition, many of them may be activists and protesters.

Customers expect the companies from which they buy to uphold high social and environmental standards. Shareholders want to know that the companies in which they invest are prepared for the future, and working to avoid reputational and financial risk. Employees want to feel pride in the companies for which they work, and to feel they are helping to make a difference. And activists want to know that companies are interested in anticipating their concerns for environmental protection rather than waiting to become a protest target. If I were in charge of a major (or minor) company, I'd get started sooner rather than later.

At Carbon Clear, we have long encouraged companies to face the climate change challenge head-on and embrace the opportunities that come along with complete carbon management. The survey results from the U.S. show that, when it comes to climate change, the time is right for more businesses to join the Reality-Based Majority.

The hydrologic cycle is the process by which water evaporates from the land and the surface of oceans, lakes and rivers, is carried by the wind and then falls as rain or snow. Since the oceans cover 71% of the earth's surface, most of that evaporation and precipitation occurs over the oceans, and can be monitored via changes in surface salinity. Where evaporation is strong the remaining water will be saltier. In areas of heavy rainfall, surface water will be fresher.

Preliminary findings from ocean salinity research indicate that the global water cycle has been speeding up since the 1950s. According to the research team, salty areas have become saltier than expected, and relatively fresh areas of ocean have become even fresher. That means that both evaporation and rainfall have become more intense as a result of global warming - dry areas will get drier and wet areas will get wetter. Climate models predicted such changes long ago - thus the warnings of increased droughts and flooding as the planet warms.

What is surprising is the rate of change. The research shows the water cycle is accelerating at a rate of 8% (+/- 5%) per degree of warming, or a roughly 4% acceleration since 1950. This rate is twice what is predicted by computer models. If it continues, we might see a 20% acceleration in the hydrologic cycle by the end of the century.

The initial predictions were worrisome enough, but these forecasts, if they are borne out, would be very bad news. Remember last year's drought across the southern U.S.? Imagine droughts that are 20% more intense on average, meaning quite a few will be a lot worse. Images of the Dust Bowl spring to mind. Remember the devestating floods in northern England a few years ago? Picture downpours that dump 20% more rain on average onto swollen rivers, with more than a few storms producing even heavier rainfall.

While this research was conducted by a well-respected team of scientists and peer-reviewed before publication, it is based on older datasets going back fifty years or more. New and more comprehensive data is being gathered by a recently launched NASA satellite called Aquarius. Thus, it is possible that Durack, Wijffels and Matear have overstated the case, that the weather related impacts from climate change are not as severe as they have predicted.

I hope they are wrong, but we simply can't afford to wait. The Aquarius data won't be ready for years, and it very well may confirm these research findings. If we fail to mitigate climate change by reducing emissions, we lock ourselves and our children into even greater adaptation costs and lock in ever-greater suffering.

Not so long ago, few organisations would have invested in renewable energy systems to power their operations. Those that did, like HSBC or Google, did so for largely for publc relations or CSR purposes, or because senior managers were also committed environmentalists. Rarely was it possible to make a more traditional business case for such investments.

How times have changed.

As the New York Times reports, the U.S. military, not known as a bastion for tree-huggers, has embraced renewable energy on its largest bases. Fort Bliss, the largest Army base in America, is as large as a small state, and recently completed a $1 million investment in solar photovoltaics. Next year will likely see the start of construction on a new 20 MW solar farm, enough to power an entire town. This system is part of a longer term plan that includes wind turbines, heat pumps, and waste-to-energy systems. All of these, together with aggressive energy efficiency measures, are intended to help the base achieve "net zero" energy consumption, as well as net zero water and waste, by 2018. It shares this goal with Fort Carson in Colorado, but Fort Bliss faces a special challenge, with the number of troops stationed at the base expected to triple by 2015.

The U.S. Army is not investing millions into renewable energy for the corporate social responsibility benefit. It is not doing so for stakeholder engagement. Rather, these technologies simply make financial and operational sense. Renewables have higher up-front costs than fossil fuels, but have considerably lower running costs. With fuel prices likely to continue rising into the future even as budgets shrink, renewables represent a long-term investment in financial cost management by the military. What is more, using renewable energy on a widespread basis on the country's largest bases gives soldiers and staff operational experience using these technologies. Military planners expect renewables to become more useful in field deployments in future, so the more comfortable soldiers are using them before they head overseas, the better.

The military is not alone in their newfound appreciation of renewable energy. As the cost of PV panels has fallen, the justifications for going green continue to multiply. Renewable energy systems not only help to achieve CSR and staff engagement goals, but they can also ensure reliability of supply and provide long term price stability to help the finance director sleep at night.

Times have changed. The greener option is increasingly the option that makes the most business sense. Just ask the U.S. military.

This was a technical training session, aimed at a technical audience, scheduled for 8:30 in the morning. As a result, I expected only a dozen or so hard-core enthusiasts to attend, and was very pleased to find a standing-room-only crowd of 70-80 people eager to discuss how to implement this exciting class of carbon projects.

The content of the session was considerably more technical than the norm for this blog, so I'll preface my overview with a quick summary of the alphabet soup of acronyms we used on the day:

Chaired by Alexandra Soezer from the United Nations Environment Program, the training featured four presenters. I started off by reviewing the various PoA-related rule changes imposed by the Clean Development Mechanism Executive Board at their December 2011 meeting, and discussing how those changes affect the Coordinating Managment Entities (CMEs). The next speaker ran through the various legal permutations for how the CMEs can implement multiple CPAs. The third speaker presented a case study for a cook stove PoA that is underway in Nigeria, with an emphasis on the practical challenges of running these decentralised projects in developing countries. The fourth speaker represented a DOE charged with auditing PoAs, and described what they look for to ensure environmental integrity and compliance with the Executive Board rules.

Tuesday, 24 April 2012

This is Part 2 of my post about what low carbon prices tell us about the carbon markets. Contrary to expectations, the price signals tell a good news story about the voluntary market.

I've now attended three of the four Africa Carbon Forum events held to date. It's been interesting to see how views about the voluntary carbon market have changed over time. At the Nairobi conference in 2010, the voluntary market was mostly ignored, save for a few buyers and sellers hovering around the margins of an event focused on the Clean Development Mechanism (CDM).

In 2011, the Gold Standard and organisations supporting voluntary market projects spent their time lobbying - mostly successfully - for the CDM to adopt some of the rules (regarding suppressed demand, evolving baselines and the like) that have made the voluntary market a more welcoming place for projects that improve the livelihoods of local communities.

In 2012, ACF delegates regarded the voluntary market in a new light. The European Union's spokesperson stressed that, starting next year, they would only allow compliance credits from project types and countries where carbon finance could make a real commitment to sustainable development (regular readers will know that sustainable development benefits have always figured highly in Carbon Clear's project selection criteria). Meanwhile, an entire panel session was devoted to discussion how the CDM could be reformed to stress social and environmental co-benefits, and the Gold Standard was invited to participate to share how it has been successfully pursuing this goal with its voluntary protocols. With the European Union limiting carbon purchases from middle-income developing countries, delegates wondered whether it would be left to the voluntary markets - along with the ill-defined "new market mechanisms" - to continue driving the low-carbon transition in those economies.

And on the last day, one African delegate had the temerity to ask whether we would end up in a situation where all the "good" carbon projects ended up in the voluntary market, while all the generic or "bad" projects (to use his descriptions) would go to the compliance market.

What a change! There was a time when offset customers were told that the voluntary market was full of cowboys and had a long way to go to match the environmental integrity of the compliance market. The fact of the matter is that much of the voluntary market has matured rapidly and can now match or exceed the compliance market in terms of environmental integrity. In addition, the price signals in the voluntary market perhaps tell us more than those in the compliance market about the future of the carbon markets.

The first thing to note about carbon prices in the voluntary market is that they have been less volatile than in the compliance market. Verified Carbon Standard prices dropped in tandem with the Clean Development Mechanism after the 2008 economic downturn, but then stopped falling. As a result, the price spread between generic VCS credits and CDM credits is only around €2, far narrower than it was in 2008. The second thing to note is that projects that deliver non-carbon benefits have fallen less in price. VCS credits that have undergone certification against a social or environmental quality screen like Social Carbon or Climate, Community and Biodiversity sell for the same price as CDM credits, if not more. Gold Standard voluntary credits, which undergo strict social and environmental checks, have fared even better despite a huge quantity of new supply on the market.

Why is the oft-neglected voluntary market holding up better than the compliance market? The first clue is in the name.

Compliance buyers buy carbon credits mainly to avoid fines and penalties for exceeding their government-mandated targets. They only buy when they must. As the name suggests, voluntary market buyers are not required to offset their emissions. They do it because they want to - or more accurately, because it makes business sense to buy carbon credits.

In the voluntary market, companies offset their emissions for many reasons, for example, to establish an internal price of carbon in advance of regulation. They offset their emissions to present new and innovative offerings to the market, to engage their staff and customers, to demonstrate their corporate social responsibiltiy leadership, and more. These business drivers don't depend on the economic cycle for their relevance, at least not as much as those driving the compliance market. The result? When the economy slowed, companies in the voluntary market paused, then continued to offset their emissions.

As for the delegate who asked whether the "good" carbon projects would all end up in the voluntary market? His question reflected the fact that some voluntary customers want more than an emission reduction. To be sure, with the costs of climate change becoming more apparent day by day, we should be supporting as many projects as possible that offer robust greenhouse gas reductions. But for companies committed to corporate social responsibility, projects that offer broader sustainable development benefits can help them achieve multiple objectives simultaneously. Indeed, as I have argued before, those broader benefits may be the main reason many companies invest, with the carbon market serving merely as the vehicle. When presented to the right customers, such projects are relatively immune to market fluctuations.

In summary, the differing price responses to the economic downturn in the compliance and voluntary markets demonstrates how different these two markets truly are. Companies that choose to go beyond compliance and offset their emissions voluntarily often make a long term commitment that helps moderate prices in the voluntary market. Encouragingly, these price signals are encouraging developers to bring more projects to market that provide multiple community and environmental benefits beyond carbon reductions.

Monday, 23 April 2012

A big point of discussion at the Africa Carbon Forum was around what today's very low carbon prices mean for market participants. Since 2008, the price of European Union Allowances has dropped precipitously, from a high of €28 to less than €8 today. Critics claim the collapse in prices means the market has failed, that it is not delivering emission reductions, and that it should therefore be scrapped. Those critics are wrong, but the reasons differ depending on which carbon market you wish to examine. Part 1 of this post will explore the issues facing the compliance market, while Part 2 will look at the voluntary market.

The compliance market is one of two main carbon markets in the world, and by far the larger. In the compliance market, government regulators set quotas for the allowable greenhouse gas emissions from individual companies. Firms are expected to implement energy effiency, fuel switching and other measures to reduce emissions and meet the cap. If they outperform, they are allowed to sell any excess allowances on the market. However, if the companies exceed their quota, they must buy allowances from more carbon efficient firms. This cap-and-trade system is a price discovery mechanism meant to identify all of the most cost-effective emission reductions across an industry. Cap and trade therefore lowers the cost of reaching the government's overall carbon target. In the EU, firms also have the option of purchasing credits from carbon reduction projects in developing countries, via the Clean Development Mechanism (CDM), up to certain limits. The CDM provides a safety valve for the compliance market, helping to ensure that emission reduction targets can be achieved without imposing excessive financial costs on important sectors of the economy.

In the voluntary market, companies go farther, with fewer tools. They make the decision to voluntarily achieve emission reductions beyond any regulatory targets. However, these firms lack an established cap-and-trade system that would allow them to trade carbon credits with their peers, and with more and more firms pledging to reduce emissions to zero, there would be no excess credits to sell in any event. As a result, most companies that go beyond compliance achieve part of their zero-carbon target through in-house reductions, and the rest through outsourced reductions bought from the voluntary carbon market. We'll discuss the voluntary market in Part 2 of this post.

So what's going on with the EU carbon price? Put simply, demand fell and supply increased. When sellers outnumber buyers, expect the price to fall. On the demand side, the 2008 economic collapse happened, and regulators didn't see it coming. When the EU Environment Agency set their current emissions cap back in 2007, they assumed both the economy and emissions would continue growing every year. But they didn't. The housing market crash hit the construction industry hard, and the steel and cement industries suddenly found themselves with many more carbon allowances than they needed to hit their targets.

Meanwhile, the Environment Agency decided to get tough on the flow of cheap carbon credits from projects in China and India that destroy industrial gases like hydroflourocarbons (HFCs), and in some cases nitrous oxide (N2O). The EU announced a ban on the purchase of credits from those projects after December 2012 in an effort to limit supply and ensure more of the credits sold into the market came from clean energy projects. Carbon Clear has never sold credits from industrial gas projects, and I think this was the right decision by the EU.

However, the timing could not have been much worse. Rather than limiting supply from HFC and N2O projects, the EU's move has had the opposite effect. Industrial gas project developers have flooded the market in an effort to get as much return on their investment as possible before the EU's ban comes into force. The CDM has seen record flows of new credits in the past few months, in the face of lacklustre demand. This supply glut puts even more downward pressure on the carbon price.

Today's shockingly low carbon price in the EU-ETS, then, is evidence that the market is working. EU regulators set up a cap-and-trade scheme and asked the carbon market to hit its targets at the lowest overall price. And this is exactly what the market has done. The EU will hit its overall carbon target, and the carbon price is not driving away business or putting a heavy burden on poorer members of society. Anyone familiar with the phase-out of CFCs and the success of the sulfur dioxide trading scheme in the USA would have expected this encouraging result.

That's the glass half-full story.

The problem, however, is that today's carbon price is not high enough to incentivise structural changes in polluting industries. It is cheaper for many companies simply to buy allowances or international carbon credits than it is to invest in energy efficiency measures or shut down their coal-fired furnaces and switch to cleaner fuels. What is more, firms that are making investments based on today's carbon prices may be locking us into another 30-50 years of higher carbon emissions. We need to send a clearer price signal that encourages these firms to make a more significant clean energy transition.

What the low price of EUAs and CERs is telling us, then, is that, while the market is working as intended, regulators around the world have not been sufficiently ambitious in the emission reduction targets they have set. The EU is achieving its original emission reduction goals at a fraction of the cost anticipated when those targets were set. For those of us concerned with avoiding catastrophic climate change, the logical next step for the EU would be to set an even more ambitious target.

Legislators in the United States, similarly, can see from the EU experience that we can encourage the transition to a low-carbon economy and achieve emission reductions far more cost-effectively than anyone believed just a few years ago. This knowledge can help overcome opposition to a national cap-and-trade system and simultaneously drive demand for international credits that contribute to sustainable development around the world.

In summary, those who argue that low carbon prices mean the market has failed have gotten it almost exactly wrong. Low prices are a good news story, showing that we can achieve even more ambitious emission reductions at a manageable price.

What we need is the political courage to set those more ambitious targets.

Wednesday, 18 April 2012

This week we're at the Africa Carbon Forum in Addis Ababa, Ethiopia, where I'll be speaking at a training session on Programmes of Activities. And catching up with old friends and associates.

The Africa Carbon Forum, or ACF, brings together government representatives, private investors and carbon project developers, consultants, academics and NGOs. The goals: share information, identify carbon project opportunities and figure out how to make the carbon markets work for Africa.

Until recently, it could be argued that the carbon markets were not working for Africa. According to the UN Environment Program, fewer than 3% of all Clean Development Mechanism carbon credit projects were in Africa, and 4% of all carbon credits. For a region with 14% of the world's population and a disproportionate exposure to climate change impacts, Africa has clearly been under-represented.

Much of the conversation at the last few ACF meetings has been about how Programmes of Activities, or PoAs, can help change this situation. PoAs allow you to register carbon credit projects that are made up of a number of decentralised activities that can be rolled out over a period of years. The traditional project approach was suited only for relatively large, standalone activities, like hydroelectric power stations and landfill gas capture schemes. Those traditional approaches are challenging for projects that provide benefits to poor, widely dispersed rural communities. PoAs are distributing improved cook stoves, water purification systems, or solar-powered lanterns across an entire country.

Since the adoption of Programmes of Activities, the number of new carbon credit projects in Africa has skyrocketed. That's good news for people across the continent who lack ready access to clean energy services.

But, like traditional projects, these initiatives must be well-managed and rigorously monitored to generate carbon credits with robust environmental integrity. Thus my session tomorrow morning. I'll be participating in a training for organisations that want to manage these far-flung PoAs, helping to ensure that they understand the rules laid out by the Clean Development Mechanism.

I'll say more in subsequent posts about the conversations and presentations at this week's conference.

Friday, 13 April 2012

Quick quiz: What's the leading cause of death for children around the world?

A: Malnutrition
B: HIV/AIDS
C: Malaria
D: Respiratory infection

Well done if you guessed (D) - the photo* provided a hint.

According to the World Health Organization (see Table 3), acute respiratory infection is the leading cause of death for children under five around the world. More than HIV/AIDS, or malaria, or malnutrition, or diarrhoea.

Around the world, parents and their children are exposed to indoor air pollution dozens or even hundreds of times higher than World Health Organization (WHO) limits, as they prepare their meals or boil water using dirty fuels on inefficient, polluting cook stoves. The United Nations estimates that more than two billion (that's 2,000,000,000) people around the world cook with these traditional solid fuel stoves, using technology that hasn't advanced much since the Stone Age. It's a practice that damages lives, livelihoods and the environment. Governments aren't doing enough to tackle energy poverty in the developing world. Grant funding tends to be too small and too short-lived to make much difference. It's an outrage.

Helping people access cleaner stoves and fuels can reduce exposure to indoor air pollution and improve health. Reducing fuel consumption and shifting to modern fuels can reduce labour burdens for the women and girls who spend hours each day collecting firewood. Where families must spend money to buy wood and charcoal, more efficient cooking translates into immediate financial savings. What's more, reducing wood consumption helps to ease pressure on our precious remaining forests, with attendant benefits for biodiversity, soil quality and watershed management.

There's another benefit worth mentioning. Improved stoves, fuels, and cooking techniques can translate into reduced greenhouse gas emissions. And that fact means projects that deliver improved stoves and fuels can, when properly designed, generate carbon credits for sale to organisations that wish to offset their own greenhouse gas emissions. Indeed, the anticipated carbon credit revenue can be enough to cover most of the capital and running costs for household energy projects.

The funding and monitoring mechanisms in the health and forestry sectors are simply not well-enough developed to channel resources to these projects on the scale required. It's been fifteen years since I first heard that two-billion without clean energy number. Fifteen years later, the number has not diminished significantly.

Fortunately, carbon finance is up to the challenge. The carbon markets provide us with an opportunity to leverage the power of the private sector to craft more sustainable solutions to these problems. The carbon markets are big enough to channel millions or billions of dollars into clean energy projects that benefit households and communities. Unlike the one- or two-year grants provided by governments and charitable foundations, carbon finance is patient capital, with projects typically running for ten years or more. Companies like Carbon Clear have established stakeholder consultation processes, legal mechanisms, independent quality standards and robust monitoring and verification systems that allow carbon credit buyers to send money to the developing world and track results over the long term.

With carbon offset projects like wind farms, hydropower and methane capture, the emission reductions are reason enough to sponsor the initiative. After all, climate change is one of the most pressing problems of our time and projects that put us on a path to a lower-carbon future deserve support. Co-benefits like local job creation and charitable contributions to nearby communities are a bonus.

Household energy projects turn this logic on its head. These are initiatives that deserve large-scale and long-term support even absent their contribution in the fight against climate change. However, it is their greenhouse gas reduction potential, and the growing maturity of the carbon markets, that makes it possible to channel that support.

With household energy projects, buying carbon credits become much more than a way to tackle climate change. Buying carbon credits makes it possible to reduce indoor air pollution, reduce women's labour burdens, fight deforestation, improve soil and water quality, preserve biodiversity and help families save money.

Carbon offsets can make wonderful things happen.

(*Thanks to People & Planet for the photo, which provided a hint to the right answer.)